Question

Caspian Sea Drinks is considering the purchase of a plum juicer – the PJX5. There is no planned increase in production. The PJX5 will reduce costs by squeezing more juice from each plum and doing so in a more efficient manner. Mr. Bensen gave Derek the following information. What is the IRR of the PJX5?

a. The PJX5 will cost $2.12 million fully installed and has a 10 year life. It will be depreciated to a book value of $219,603.00 and sold for that amount in year 10.

b. The Engineering Department spent $42,145.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $22,075.00.

d. The PJX5 will reduce operating costs by $369,145.00 per year.

e. CSD’s marginal tax rate is 34.00%.

f. CSD is 58.00% equity-financed.

g. CSD’s 15.00-year, semi-annual pay, 5.15% coupon bond sells for $1,028.00.

h. CSD’s stock currently has a market value of $22.95 and Mr. Bensen believes the market estimates that dividends will grow at 3.32% forever. Next year’s dividend is projected to be $1.49.

Answer 1

depreciation = (2120000 - 219603) / 10 = 190,039.7

research and redsign costs are sunk costs hence do not have to consider while calculating IRR.

IRR = 8.50%

(formula can bee seen in the formula bar)